Never include operative clauses in conditions

n my series of best practice rules on drafting conditions, best practice rules 5, 6 and 7 relate to drafting in a strict sense. I take them together here in this blog post. Previous posts on best practice rules related to ‘drafting conditions’ can be found here and here.

5)      Never include a warranty, an obligation or other operative clause in a condition.

A condition is a hard and fast statement. By including an obligation, warranty or other operative provision in a condition, the condition (and its strong effect) may easily become ambiguous or even loose its character of conditionality. For example:

The License is subject to the condition that Licensee is at all times in full compliance with Licensor’s Trademark Guidelines and if it is not, it shall remedy such non-compliance within ten business days after Licensor notifies Licensee of such non-compliance.

Do you agree that in this example the conditionality of the license (and therefore the strength of the trademark) has disappeared or at least become negotiable? What do you think will happen if the licensee is able to remedy non-compliance at once but takes the full ten business days period? Or if during the ten business days an event of force majeure occurs (permitting the remedy only after a few more business days? How alert will the licensee be in preventing any non-compliance?

The least thing a drafter should do is to distinguish the obligation from the condition by clear conditional wording (e.g., provided that, unless, if) or by inserting the condition in a separate sentence. If there are more than two conditions or if a condition is rather wordy, it is recommended to bring all obligations (and warranties or other operative clauses) that relate to the satisfaction of a condition into a separate contract section.

 

6)      Avoid reformulating exceptions as a condition.

Exceptions pertain to a rule (which rule might be a right or an obligation) and might be governed by their proper rules (or not be governed by any particular principle). A provision is more clear and comprehensible if it distinguishes between the rule and the exceptions to that rule, than if the rule is formulated such that the exceptions become conditions for the inapplicability of that rule. Conditions may give rise to further distinctions or to their own contractual regime, which may become a source of wordy clauses.

 

7)      Do not phrase the key obligation of an agreement as a condition.

For example, it is nonsense to stipulate that the transfer and delivery of the Shares would be a condition to closing. This is because despite all exclusions or limitations of liability, if one party is unable to perform its key obligation, no law would protect such party against the other party deferring the performance of its obligation. Like the (non) excludability of liability for the proper performance of a key obligation, making the transaction subject to a condition that the key obligation is performed is like repeating the law of contracts.

The obligations of Seller in connection with the Closing are subject to the following conditions being satisfied:

(e)     all Share certificates and the shareholder registers of the Acquired Companies required to complete the Transaction shall be delivered to Seller.

Exception. The best practice rule must be distinguished from a conditionality that does make sense. This might be the case if the key obligation must be performed by more than one party (e.g., several sellers who should each hand over their own shares) or if the object of the transaction consists of various objects (e.g., the shares of several companies are to be transferred). In those cases, it is appropriate that a purchaser requires that no shares are deemed to be transferred (and no part of the purchase price is available to any seller) unless all shares are actually transferred.

Purchaser shall not be required to purchase or acquire any of the Shares, unless all of the Shares are sold and transferred.

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